Strong sales failed to boost Creative Technology's first-quarter income, the MP3 player maker announced on Friday.

During the three months to 31 March, Creative recorded sales totalling $333.8m, up 65.4 per cent on the year-ago quarter's total, $201.8m.

However, net income fell 72.1 per cent year on year, from $57m to $15.9m. Excluding one-off items from both quarters, Creative's profit was still down, from $8.7m in Q1 FY2004 to $1.1m in Q1 FY2005.

During the quarter the company shipped 2m MP3 players, company president Craig McHugh said. That's the same number that it shipped in Q4 FY2004, the most recent Christmas quarter. Compare that to Apple's shipment of 4.5m iPods in Q4 2004 and 5.3m of the players in Q1. Creative is a very long way from achieving victory in its 'war' with Apple, declared in November 2004.

Indeed, it's competition from the likes of Apple that hit Creative's income so hard, the company said. January's launch of the Flash-based iPod Shuffle, updated iPod Minis and price-cuts on other models forced Creative to cut its prices too, reducing its profit margins, from 34 per cent a year ago to just 23 per cent. They will continue to fall, it warned, to around 20 per cent.

"During the quarter we reduced the selling price following sharp price drops by Apple on the Mini and the introduction of flash players at lower-than-expected prices," said McHugh. "These were the major factors in the decrease of gross margins."

The current quarter will see sales of $330-360m, Creative said. Income will fall or rise slightly, on the back of those declining margins. ®